As the oil price crash hits North Sea projects will deals between producers and service firms dramatically change?
This week Ithaca Energy redrew the contract for its Greater Stella deal with Petrofac.
Under the new incentivised terms, Petrofac could make or lose $34million in the space of months. It all hinges on Petrofac hitting Ithaca’s preferred sailaway day.
Dr Marc van Grondelle, head of the global ventures practice for KPMG in the UK, said the move was the start of a wider, emerging North Sea trend, which will see the service and operator sides enter into contractual “marriages”.
“I would say working together is the name of the game in the supply chain now,” he said.
Van Grondelle, who has managed joint ventures ranging from $600million to $40billion in asset value, referenced a recent shared risk model he was part of.
“There was a deal with a very large and famous oilfield service firm working with very large and famous national oil company,” he said.
“But the NOC said we don’t have any money and we can’t pay you, which is a very difficult conversation to have.”
The service firm later agreed to work for free on the basis that it would get a final stake in end production.
“It was a very clever model where the service firm actually became an incorporated partner and that service firm was paid in the equivalent of barrels of oil.”
He added: “You see this in other parts of the world – in the Middle East and other parts of Europe – where oil companies want to see that the service firm is solely committed to what’s important to them. In this case, the sailaway.”
Ithaca isn’t alone in its model. Statoil deployed the tactic for its Mariner deals, drafting up new contracts with the supply chain, including an incentive-based deal with Schlumberger. Independent Oil and Gas (IOG) has also struck a number of deals with the service companies, which have providers committing either to part-fund the well, defer payment or provide loans to secure their participation in the firm’s Skiper licence. The package tallies up to a £7million commitment.
“If it goes well you’re laughing your way to the bank,” van Grondelle said.
But a contract written around rewards versus lowest bidders isn’t without its stumbling blocks, according to the finance expert.
The former Shell exeuctive said: “You have to delve below the contract and into the operational delivery to make this work.
“There can be no reason why they can’t execute the work to hit the deadline. The company can’t call and say I didn’t hit my deadline because it took me four week to get a signature from you. That’s not a conversation you want to have.
“It’s essentially a marriage.”
That marriage includes everyone knowing their exact place and duties.
“I would say as company ‘X’ I will willing and lovingly take the risk but I need these 73 things done or we’re well on our way to failure which is not good for me and is not good for you,” he said.
“My view is we’ll see much more this – more risk sharing and more reward sharing.
“If you’re the contractor you can’t be so desperate for work that you’ll take anything. If you’re the contract giver you can’t write something that’s undoable.
“Instead both parties need to be thinking if we go into this marriage what are we going to do to make this work. What do I need from you and what do you need from me.”
A low oil price is paving the way for more novel contractual concepts to come to the foreground, according to the industry veteran – ones that allow service firms the potential for long-term stability.
“As an organistion you could say we wouldn’t mind having a steady income flow over the next 20 years versus sending them a big bill and moving on,” van Grondelle added.
However, Stronach’s Ewan Neilson said set-up goes beyond risk and verges on gamble.
The firm partner and head of energy said a similar approach was adopted by the industry in 1998 through 2002, but the incentives stopped short of creating a robust and healthy operating front.
“Incentivisation presents the opportunity for contractors to be paid more based on certain behaviours but it also I think creates a risk where the service firm expects to get that bonus no matter what happens,” he said.
“If it doesn’t get the incentive through hitting the target, the firm will then find ways to increase the variations orders, which will increase the scope of work, which will the increase what they end up getting paid.”
He added: “The operators have to be careful that they don’t force the contractors to take enormous gambles that they can’t afford.
“And the contracting community has to be careful that they don’t run into liquidation because they can’t deliver on the targets.
“But neither of those things change the fact that things need to be different. Costs have to come down.”
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